The standard rate of UK VAT will be reduced from 17.5% to 15%, with effect from 1 December 2008 until 31 December 2009. The rate will revert back to 17.5% on 1 January 2010.
The reduced rate will neither impact zero-rated goods (such as basic foodstuffs and children's clothing) nor supplies subject to the 5% reduced rate (such as domestic fuel and power).
Anti-forestalling measures are to be introduced in the Finance Bill 2009 to prevent businesses from taking advantage of the VAT rate increase on 1 January 2010 by making prepayments.
Our View
As a consequence of the change, businesses will face systems issues to implement the new rate, including dealing with payments already received for goods and services to be delivered after 1 December (and vice versa) as well as credit notes.
Retailers will have the substantial task of repricing their goods if they are able to pass on the rate change to consumers, alongside discounting measures that many will be taking already to stimulate trade in the face of the economic downturn.
Larger businesses may wish to consider the level of the payments on account that they have to make, since these should be reduced to reflect the new, lower VAT rate. Businesses may also wish to consider the timing of purchases, particularly capital purchases, especially where the VAT on the cost will not be fully recoverable.
The impact on ordinary consumers is not likely to be significant as we calculate that (even if the VAT saving is passed on in full) the average family will only save around £200 per year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
